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Clifford Chance

Clifford Chance

Construction Insights

FIDIC Silver Book 2017 – 5 implications for project finance

At the end of 2017, FIDIC released its long-awaited update to the 1999 first edition of the Silver Book.

Despite a stated intention to be suitable for international project finance (PF), the Silver Book 2017 not only retains a number of first edition positions which did not align with typical PF norms, it also adds some further anomalies to that group. As a result, it is likely to require considerable amendment in order to align it with typical PF expectations, even for smaller deals.

1. Claims and Disputes – more process

"Claims" and "Disputes" are now defined separately and subject to separate regimes (in Clauses 20 and 21 respectively). Perhaps the most striking change in Silver Book 2017 is that the claims process is intended to apply equally to claims by either the Employer or the Contractor, including in respect of time bars for bringing claims. In a PF context, the difference between the resources and functions of a typical “thin” SPV Employer and a typical turnkey Contractor would arguably have justified retaining an asymmetrical approach, especially in respect of time bars. If left unamended, these procedures will necessitate expanded Employer resource (whether internal or hired in). Conversely amending the regime will be cumbersome as it applies to both parties.

Further, a new clause (8.5) preserves the position realised in Obrascon [1] in prolonging the period within which the Contractor must bring claims before it is time barred, without Employers benefitting from a similar prolongation period for their claims.

All formal disputes must now be referred to a standing Dispute Avoidance/Adjudication Board for a provisionally binding decision as a condition precedent to arbitration. While admirable in its intention (best dispute resolution practice clearly involves both avoidance and effective fast track mechanisms), a mandatory standing disputes board may add unwanted expense to competed projects where the need to minimise capex is fierce. Similarly, the need for flow-down decisions reached in higher tier project documents and/or the potential unenforceability of DAAB decisions in certain jurisdictions may make subscription to the DAAB regime inappropriate.

2. It contains some non-typical Project Finance positions

Various standard mechanical requirements of PF lenders, such as appropriate assignment rights, LTA attendance and inspection rights, ESAP compliance and a duty to provide a direct agreement are (still) not included.

Various other provisions are (or remain) inconsistent with typical PF requirements. We have set out a number of these below. Other examples, as well as more detail on the below, can be found in our client briefing on the update.

  • Caps and Waivers (Clause 1.14) – the list of carve-outs from both the overall liability cap and the waiver of "indirect" and "consequential" losses remains narrower than typically seen on PF deals. Further, given that different legal jurisdictions have widely different interpretations of what is meant by the "indirect" and "consequential" loss which is excluded in Silver Book 2017, it is common practice in the PF market to define comprehensively the economic losses in respect of which rights are waived, rather than rely on these generic concepts.
  • Performance Security (Clause 4.2) – a number of common PF lender issues with the performance security provisions in the first edition remain. By way of example, the list of permitted grounds for calling the bonds raises, under common law at least, an enhanced risk of challenge/injunction from contractors and there is no protection against bond issuer credit downgrades or provision for minimum stipulated credit ratings for bond providers.
  • Subcontractors (Clause 4.4) – the definition of "Subcontractor" now stops after tier 1, which risks undermining the principle of the Contractor fully wrapping its supply chain.
  • Contractor Indemnities (Clause 17.4) – the 1999 edition indemnities expressly covered claims arising out of the Works and "the remedying of any defects". The coverage for defects has now been deleted without evident justification for this. A further condition has been imposed on the property damage indemnity that the damage must be attributable to Contractor default/breach/negligence. This both dilutes the indemnity and reverses the burden of proof compared to the 1999 edition. Both changes are arguably inconsistent with a PF/turnkey approach.
  • Shared Indemnities (Clause 17.6) – this new provision reduces the Contractor’s indemnity liabilities in respect of death, injury, damage to property and IPR infringement proportionately to any contribution to those outcomes caused by the Employer's retained risks. It is difficult to understand the perceived interaction between the IPR indemnity and the Employer's retained risks.
3. It may have missed a trick or two

A number of the market and technological developments we have seen since 1999 are not expressly catered for, which is a pity. For example:

  • Renewable energy projects comprise one of the largest and fastest growing segments of the EPC turnkey market at which Silver Book 2017 purports to be aimed, but are arguably not adequately catered for. For example, it is standard practice in renewables contracts for the critical performance tests (e.g. the 12-24 month output tests on solar plants) to take place after taking over. The 'Tests after Completion' mechanism in clause 12, however, is very light, which is symptomatic of the proposition in the Guidance Notes that any requirement for such tests is “exceptional”.
  • FIDIC have chosen not to include any changes or provide any optional clauses in Silver Book 2017 dealing with the increasing global use of BIM.
  • The use of cash retention in lieu of bonding is arguably regressive compared to PF market practice, which rightly focusses on maintaining optimal project cashflows to the ultimate benefit of developers, lenders and contractors alike.
4. It is twice as long as the 1999 first edition

Another of the most notable features of Silver Book 2017 is its length. Taken together, the General Conditions, DAAB Rules and Guidance Notes are more than twice the length of the 1999 edition. With length, comes significant added process and complexity, particularly around notifying, processing and, if it comes to it, disputing claims (see section 1 above).

The additional length and complexity will make amending Silver Book 2017 to align it with PF and project-specific requirements a more cumbersome process.

5. It "strongly recommends" 5 new Golden Principles

Silver Book 2017 "strongly recommends" adherence to five 'Golden Principles', each of which stipulates requirements which "must" be met by users. One of the Golden Principles is a requirement that "the duties, rights, obligations, roles and responsibilities of all the Contract Participants must be generally as implied in the General Conditions, and appropriate to the requirements of the project", while another requires that "[the] Particular Conditions must not change the balance of risk/reward allocation provided for in the General Conditions".

There is some inherent tension here. Some substantive amendments are typically required to any template to tailor it to the specifics of a particular project and local law (and the Guidance Notes acknowledge this). Silver Book 2017 has, however, also arguably changed the overall balance of risk and reward in Silver Book 1999 in favour of the Contractor, with measurable consequences in terms of retained Employer risk/cost and bankability. If it is to succeed in its stated mission of being suitable for use in the PF market, we think considerable amendment will be required.

[1] Obrascon Huarte Lain SA v Attorney General for Gibraltar [2014] EWHC 1028 (TCC)